Sylvamo Corporation — Q2 2022 Form 10-Q
Business context and period. This quarterly report covers the three and six months ended June 30, 2022. Sylvamo, a producer of uncoated papers and market pulp operating in Europe, Latin America and North America, completed its spin-off from International Paper on October 1, 2021. Prior-year results are combined carve-out results and may not reflect the costs of operating as an independent company. Unless noted, financial amounts are in millions of dollars and continuing operations exclude the Russian business, which was classified as discontinued operations in Q2 2022.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $912 | $695 | $1,733 | $1,319 |
| Income from continuing operations | $84 | $101 | $139 | $139 |
| Net income (loss), including discontinued operations | $(59) | $115 | $(33) | $177 |
| Diluted EPS from continuing operations | $1.89 | $2.30 | $3.13 | $3.16 |
| Adjusted EBITDA (non-GAAP) | $189 | $104 | $335 | $191 |
| Adjusted EBITDA margin (non-GAAP) | 20.7% | 15.0% | 19.3% | 14.5% |
| Operating cash flow from continuing operations | Q2: $76 | Q2: $110 | $130 | $155 |
| Free cash flow (non-GAAP) | Q2: $39 | Q2: $96 | $71 | $128 |
Sales rose 31% in Q2 and 31% year to date, primarily from higher prices. Cost of products sold also increased, reflecting higher input and operating costs. Q2 continuing-operations income was below the prior-year quarter despite higher sales; reported net income was reduced by Russian-related discontinued-operation charges. Q2 segment operating profit was $142 versus $69; for the six-month periods it was $245 versus $122. The company’s non-GAAP adjusted EBITDA and segment operating profit exclude specified items and should not be treated as GAAP measures.
By segment, Q2 operating profit was $17 in Europe, $59 in Latin America and $66 in North America, compared with $4, $44 and $21, respectively, a year earlier. Pricing and product mix were the principal benefits; higher energy, pulp, fiber, chemical, operating and distribution costs offset some gains.
Balance sheet, debt and liquidity
- At June 30, 2022, cash and temporary investments were $157; total assets were $2,741 and total equity was $252.
- Long-term debt was $1,290, with $25 of current maturities and notes payable. The $450 revolving credit facility had no borrowings and approximately $440 available.
- Six-month financing cash outflow was $92, primarily reflecting debt repayments of $20 on the revolver, $55 on Term Loan B and $7 on Term Loan F.
- Six-month cash from continuing operations declined to $130 from $155, mainly because working capital used $85 of cash. Capital spending was $59, versus $27 in the prior-year period.
- Debt includes floating-rate term loans and 7.00% senior notes due 2029. Financial covenants include leverage and interest coverage tests; the leverage limit is scheduled to tighten after Q2 2022.
Material developments, outlook and risks
- Russian divestiture and charges: Management committed to sell the Russian operations in Q2 and presented them as discontinued operations. The operations include a mill and harvesting rights on 860,000 acres; they represented about 15% of 2021 net sales and 10% of long-lived assets. The company recorded a $68 pre-tax fixed-asset impairment in Q1 and a $156 pre-tax charge in Q2 for cumulative currency translation losses. The filing warns that a sale, regulatory approval or repatriation of proceeds is not assured.
- Near-term outlook: For Q3, management expected strong global uncoated freesheet demand and favorable selling prices, including benefits from announced price increases, to help outpace input and transportation inflation. It also cited continuing cost inflation, supply-chain constraints and geopolitical challenges. No numerical earnings or sales guidance is provided in the supplied filing text.
- Capital returns: The board declared a quarterly dividend of $0.1125 per share, paid July 15, and authorized repurchases of up to $150. The program does not require the company to repurchase shares.
- Brazil tax dispute: Assessments related to goodwill amortization totaled approximately $114 in tax and $355 in interest, penalties and fees as of June 30. Under the tax matters agreement, Sylvamo bears 40% of amounts up to $300, while International Paper bears 60% of that portion and all amounts above $300. Litigation may take years; the company believes its position is supportable.
- Other contingencies: Probable environmental remediation liabilities were estimated at $23, all associated with Russian operations. The filing says pending legal matters are not expected to materially affect financial position or liquidity, while acknowledging that future adverse developments could materially affect results or cash flows in a period.
- Governance and operating risks: A rights agreement adopted in April 2022 may deter or delay an acquisition. Other stated risks include the war in Ukraine, sanctions and countermeasures, Russian operating and currency risks, inflation, recession, raw-material and freight availability, and Sylvamo’s limited stand-alone operating history.
Most important facts for investors to verify
- Progress, terms, approvals and potential proceeds of the Russian sale, including any further impairment or cash-repatriation restrictions.
- Whether pricing and demand continue to offset input, energy and transportation inflation, and whether working-capital outflows reverse.
- Debt reduction, covenant headroom and exposure to variable interest rates as covenant thresholds tighten.
- Developments in the Brazilian tax litigation and the potential amount and timing of Sylvamo’s share of any assessment.
- Reconciliation and definitions of non-GAAP adjusted EBITDA, margin and free cash flow when comparing Sylvamo with other companies.